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Ask the Experts: Investments that cushion inflation’s impact

By Claudia Buck, The Sacramento Bee –

Worried about how to protect your investments against inflation? That topic is addressed this week by investment adviser Tony Bell of Bell & Co. Private Wealth Management in Sacramento, Calif.


QUESTION: Inflation has been quite low the last several years. Many do not recall the inflation rate of 10 percent-plus during the Nixon/Ford/Carter administrations. If I believe inflation will rise significantly and persist in the future, where should I invest my cash: CDs, bonds, equities, natural resources/commodities, real estate? Or are there other types of investment vehicles? Thanks.

ANSWER: This is a great question. Inflation is the hidden evil behind eroded returns, diminished spending power and frustration by those on fixed incomes. Given the dollar’s declining value, low-interest-rate monetary policy and government spending, there is no doubt inflation is coming. The question is when.

The unfortunate truth is there are few strategies to avoid inflation altogether. An investor, however, can reduce the impact of inflation to his/her portfolio.

Here are a few ideas:

—Real estate securities: Real estate securities can hedge high inflation through increases in rental prices of properties. Long-term leases in sectors like office and retail may have the ability to increase rents with changes in the consumer price index. Properties with short-term leases, like hotels and apartments, can boost rents as leases expire. Real estate investment trusts are a great way to gain exposure to this market.

—Commodities: Prices of commodities, such as oil, metals and other natural resources, tend to rise much faster during inflationary times. An increase in demand for a finite amount of commodities during inflationary periods further accelerates prices.

There are securities — such as exchange-traded funds, mutual funds and limited partnerships — that allow retail investors to invest without buying the actual commodities. Asking your broker would be a good start.

—Treasury Inflation-Protected Securities (TIPS): These securities, which are issued by the U.S. Treasury, are structured where the principal increases with inflation and decreases with deflation, based on the CPI. TIPS are issued in five-, 10- and 30-year terms. TIPS pay interest twice annually at a fixed rate and can be purchased directly from the Treasury.

Just remember: Inflation is a cycle, and having a balanced portfolio takes precedence over any tactical changes.

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